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BASIS OF ESTIMATE
TCM Framework: 7.3 Cost Estimating and Budgeting
Contributors:
Todd Pickett, CCC CEP (Author) Stephen M. Jacobson CCC
Peter R. Bredehoeft, Jr. CEP Carlton W. Karlik, PE CEP
Ted A. Downen Christopher L. Kinney
Larry R. Dysert, CCC CEP Donald F. McDonald, Jr. PE CCE PSP
Bruce G. Elliott, CCC Bernard A. Pietlock CCC CEP
John K. Hollmann, PE CCE CEP Richard A. Selg, CCE
May 2, 2014
PURPOSE
AACE Internationals Total Cost Management (TCM) Framework identifies a basis of estimate (BOE) document as a
required component of a cost estimate. As a recommended practice (RP) of AACE International, the template
outlined in the following sections provides guidelines for the structure and content of a cost basis of estimate.
In the TCM Framework, the BOE is characterized as the one deliverable that defines the scope of the project, and
ultimately becomes the basis for change management. When prepared correctly, any person with capital project
experience can use the BOE to understand and assess the estimate, independent of any other supporting
documentation. A well-written BOE achieves those goals by clearly and concisely stating the purpose of the
estimate being prepared (i.e. cost study, project options, funding, etc.), the project scope, pricing basis,
allowances, assumptions, exclusions, cost risks and opportunities, and any deviations from standard practices. In
addition the BOE is a documented record of pertinent communications that have occurred and agreements that
have been made between the estimator and other project stakeholders.
This RP is intended to be a guideline, not a standard. It is understood that not all organizations that prepare
estimates employ the same processes and practices, and therefore, may opt to use this information either in part
or in its entirety.
RECOMMENDED PRACTICE
The primary intent of this RP is to provide a guideline for the topics and contents to be included in typical BOE.
However, before describing the template contents there are a few points of significance worth noting. A basis of
estimate should:
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Qualify any rates or factors that are referenced either in the estimate or BOE; e.g. productivity can be
expressed as either units/time (linear feet/hour) or time/units (hours/linear foot).
The following describes the suggested topics and contents included in a typical BOE.
Purpose
In this initial section of a basis of estimate, the estimator should provide a brief and concise description for the
total project. The type of project should be identified (i.e., new facilities, addition to existing, revamp of existing,
etc.), as well as the type and capacity of the process units, the location of the facility, and the overall timing of the
project.
This section of the estimate basis should be organized to correspond with the projects work breakdown structure
(i.e., plant, building, floor, etc.). A semi-detailed description of the scope of work should be provided for each
major segment of the project. Identify any major pieces of process equipment or components. Its also good
practice to indicate the primary trades that will be involved with the project. Be as thorough as necessary, without
being overly descriptive, so as to adequately explain the scope of work being estimated.
Methodology
The BOE should indicate the primary estimating methodology used to prepare the cost estimate. This should
include documentation of the use of cost resources, historical data and project benchmarking. Documenting the
level of effort or man-hours used in preparation of the estimate is also recommended.
Estimate Classification
The AACE International estimate classification should be identified, along with reasons or justification used in the
selection of the estimate classification.
Design Basis
Company standards will typically specify the technical and project information required for the classification of the
estimate that is being prepared. In this section, the estimator will identify the types and status of engineering and
design deliverables that were provided to prepare the estimate including any design basis assumptions. Two
attachments to the estimate basis should be referenced: 1) an estimate deliverables checklist that is aligned with
the companys standard project process; and 2) a listing of all engineering drawings (including revision number and
date), a well as other design information, such as specifications, equipment lists, units of measure (imperial vs.
metric), etc.
In addition it may be useful to document specific quantity metrics for particular projects, such as overall excavation
and backfill quantities, overall concrete volumes, overall piping quantities, etc. These may be organized by
facilities, process train or manufacturing unit.
If material take-offs (MTOs) are provided to the estimator, identify specifically who developed the MTOs and the
methodology used.
May 2, 2014
Planning Basis
This section documents the project management, engineering, design, procurement, fabrication, and construction
approaches to the project. The contracting and resource strategies should be identified, as well as any assumptions
that were made with regard to the workweek schedule (hours worked per day, days worked per week, shifts
worked per day, etc.) and planned use of overtime. Any assumptions made regarding constructability,
modularization, use of specialized construction equipment should also be noted here.
Cost Basis
Describe the methods and sources used for determining all material, labor and subcontract pricing. Identify the
following:
Pricing sources for all major equipment (vendor quotes, historical data, etc,).
Bulk material and commodity pricing sources, including any discount strategies.
The pricing source for all labor hours, and all labor productivity adjustments. Provide appropriate detail if
productivities vary by trade and/or location within the project (plant, etc.).
All wage rates used (including crew/craft rates, craft mix, etc.). Identify all items included in all-in rates (if
used).
Pricing source and methodology for construction indirects.
Pricing source for all start-up costs.
Pricing source and methodology for all home office costs (project management, engineering, design, etc.).
Document the basis for any contractor fee costs.
Pricing source and methodology for costs such as freight, taxes, duties, etc.
Pricing source for any owners costs included in the estimate.
Currency exchange rates if applicable, as well as the stability and/or volatility of rates.
Escalation indices used, and the method of calculation (including duration).
Contingency development and basis.
Location factors used and the basis for these factors.
Influence of local market conditions.
Capital costs vs. expense costs, or other categorization as necessary.
Any other pricing factors or external influences that may have a significant impact on project cost should be
identified.
Allowances
In this section, identify the level and types of allowances used in the estimate. Describe the basis for the common
estimating allowances such as material take-off allowances, overbuy allowances, design allowances for engineered
equipment, congestion allowances, working height allowances, etc.
This section should also describe any other costs that have not been detailed in the body of the estimate, such as
lump-sum allowances for specific areas of scope or any other factored costs not described elsewhere in the
estimate basis.
Assumptions
Any other assumptions made by the estimator but not documented elsewhere in the estimate basis should be
included in this section. This may include such assumptions as an adequate labor supply being available, adequate
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funding available, site conditions, etc. Minor assumptions may become major assumptions throughout the life of
the project; therefore, it is recommended to document all assumptions regardless of their anticipated impact.
Exclusions
In this section, the estimator should document all potential items of cost which a reviewer might associate with
the project, but for which no costs have been included in the estimate. Asbestos abatement, removal of hazardous
wastes, acquisition of land, taxes, financing costs, licensing costs, etc. are examples of potential items that may
need to be identified.
Exceptions
The estimator should identify any anomalies or variances to your organizations estimating practices. This section
should document any significant deviations from the project and/or engineering deliverables normally required for
the applicable class of estimate. A good practice is to provide a checklist as an attachment to the BOE that will
document any exceptions that are identified. This checklist should correspond to your organizations estimating
practices.
Any areas of the estimate containing significant risk or opportunity should be identified. If a formal risk analysis
study has been prepared then it should be described (e.g. methodology, technique, etc.). In particular, this section
should identify those cost elements that have been identified with high or very high risk or opportunity values. The
risk analysis report (or summary) should be provided as an attachment to the BOE.
Containments
Containments are cost elements in the estimate related to measures included to prevent and/or mitigate the
identified risks. The activities are indentified in the risk analysis report. These may impact not only cost but also
duration.
Contingencies
Contingency is a cost element of the estimate used to cover the uncertainty and variability associated with a cost
estimate, and unforeseeable elements of cost within the defined project scope. Contingency covers inadequacies
in complete project scope definition, estimating methods, and estimating data. Contingency specifically excludes
changes in project scope, and unforeseen major events such as earthquakes, prolonged labor strikes, etc. The
amount of contingency included in the estimate should be identified, as well as the methods used to determine
the contingency amount. If risk analysis techniques were utilized to develop the contingency amount, the
associated confidence level should also be identified.
Management Reserve
Contingency is not intended to cover the costs associated with changes in project scope. If the project needs to
provide an allowance for anticipated changes in scope, or to cover the costs for items that may be required but
May 2, 2014
have not yet been specifically identified as being included in the current project scope, then that amount of cost,
typically referred to as management reserve, should be identified here.
The intended purpose and use of management reserve should be clearly identified. The approval process,
management and tracking of the management reserve should also be clearly identified.
Reconciliation
Provide an overview of the major differences between the current estimate and the last published estimate
prepared for this project. Identify the cost impacts due to scope changes, pricing updates, labor productivity
adjustments, estimate refinement, etc. A more detailed reconciliation or cost trending report can be provided as
an additional attachment if necessary.
Benchmarking
This section should document any comparisons of overall estimate metrics, ratios, and factors with similar
projects, historical data, and industry data. References used in the benchmark comparisons should be similar in
process type and overall value. If significant variations of the estimated values versus the benchmarks exist those
inconsistencies should be identified, explained, and/or reconciled. A more detailed benchmark analysis report may
be included as an attachment to the BOE.
Since estimate reviews are the means for testing the quality of the estimate, this section of the BOE should identify
all estimate reviews that have taken place to date, and any additional reviews that are proposed to take place. All
review comments or analysis should be included as an attachment to the BOE. In case of an external review this
section should include who executed the review, when it was conducted, and what references were used.
Estimating Team
In this section, all members of the estimating team should be identified, including roles and responsibilities.
Attachments
Several supporting documents will generally be included with the basis of estimate.
1) Attachment A: Estimate Deliverables Checklist
Attachment A: Estimate Deliverables Checklist
Attach a completed estimate deliverables checklist indicating the project and engineering deliverables that should
be provided to support preparation of the estimate for the associated estimate classification, and whether they
were in fact available during preparation of the estimate.
May 2, 2014
Additional Attachments
Include any other attachments that may be necessary or required (reconciliation report, benchmarking report, risk
analysis report, escalation calculations, etc.).
It is often not a simple matter to determine the amount of detail that should be provided in a BOE. Several factors
may come into play during the preparation of the estimate that will help determine the level of detail. However, it
is the estimators best judgment that will ultimately determine the appropriate level.
Estimates are prepared at various stages of a project. A more detailed estimate will generally require a more
detailed BOE, however that is not always the case.
A conceptual estimate will most likely be based on a limited amount of scope but may require a more detailed
BOE. It's not uncommon for a BOE for a conceptual estimate (e.g. Class 5 or Class 4) to be more thorough than one
prepared for a more detailed estimate (e.g. Class 1 or Class 2) because there are often more assumptions made at
the conceptual stage of an engagement that require greater documentation.
Conversely, there may be times when the project definition is so complete or simplistic that a BOE does not
require a great amount of detail. A three or four page document may be sufficient to convey the information
provided in the BOE.
Typically, a more expensive project will require a more detailed BOE. However, projects of lesser cost can require
an extensive BOE to fully communicate major assumptions that constrain or reduce the cost.
Type of Project
The type of project can also affect the BOE. For example, the BOE for a direct purchase (e.g., single piece of large
equipment) may be less detailed than a BOE for a construction project
Other Factors
Other factors that affect the level of detail in a BOE are: work breakdown structure (WBS), consideration for new
technologies, contracting strategy, etc.
The BOE should contain a concise level of detail to fully support the review of the estimate by those that have not
been involved in the preparation of the estimate. The BOE provides a definition of the scope of the engagement as
estimated, and should establish the basis for change management subsequent to publication of the estimate.
May 2, 2014
REFERENCES
1. Hollmann, John K., PE CCE, Editor, Total Cost Management Framework: An Integrated Approach to Portfolio,
Program and Project Management, AACE International, Morgantown, WV. (latest revision)
2. AACE International, Recommended Practice 10S-90, Cost Engineering Terminology, AACE International,
Morgantown, WV. (latest revision)
CONTRIBUTORS